This post is for those who are learning about cryptocurrencies. For those with a cursory knowledge of the space feel free to peruse the website for op-ed and ICO reviews.

What are airdrops?

I’ve written extensively about a few ICOs in my previous posts. ICOs are especially speculative because of how unproven the 1) the technology is at solving problems at scale, and 2) the intrinsic value of any of these projects. But an airdrop is different. They require no upfront investment to recipients. An airdrop is an allocation of a new token to holders of a particular token.

Examples of an Airdrop

Bitcoin Cash

BCH, Bitcoin Cash, was created with a hard fork of the Bitcoin blockchain. For those unfamiliar with a hard fork it helps to explain for a second what this means. A hard fork is a literal spitting of the blockchain where one chain retains the original software protocol and the other contains modifications. From the point of splitting, the two blockchains will share a history up to that point but will go their separate ways from that point forward. On August 1st, 2017 Bitcoin Cash introduced a number of modifications to Bitcoin that enabledhigher transaction speed albeit less decentralized than its parent chain. For every Bitcoin (including fractional shares) owned by holders, one BCH token was granted to Bitcoin holders.

Ontology

Ontology (learn more with this project review of Ontology). Neo holders were airdropped 0.2 ONT tokens for every 1 Neo held. If you held Neo tokens at block 1,974,823 you received your airdrop. I received 500 ONT tokens just for attending Neo Dev Con in San Francisco back in January of this year. Ontology’s airdrop is notable that it did not conduct a public ICO, only a private sale.

Is it really “free money”?

Airdrops are becoming more popular. They help to “seed” the network as a “user acquisition” strategy. The project is literally giving away a portion of its network value to recruit recipients to use their platform.

Hidden cost to the project

There’s a hidden cost to the project that’s not often mentioned. Let’s take for example a project working on an insurance cryptocurrency. The token on this network would unlock certain insurance benefits to network participants. How does the project know who needs insurance and who does not? By airdropping tokens to Ethereum holders, the company is assuming all token holders will use the network. This is unlikely, therefore the insurance company is essentially locking away (or rather, using the term “burn” tokens) tokens since many holders may not notice the tokens in their wallets.

A de facto dividend or a gift to the token holder

By holding Ethereum, Bitcoin or any project – an airdropped token to the parent chain can be thought of as a dividend. Project teams attempting to innovate on the parent project launch an airdrop in the hopes of a wide distribution. The airdropped tokens increase awareness. In traditional equities, holding a dividend paying stock represents taxable income. I foresee airdrops becoming a legal issue to be sorted out over the coming years. Is it a dividend? Is it a gift? Gifts over a certain value are taxable in certain jurisdictions. Does this mean that airdrop holders are liable for taxes on a gift they could not reject?

Airdrops versus bounties

Airdrops and bounties are two ways in which a project can reward its members. They are however very different. Airdrops are gifts to token holders. Bounties are rewards for performing some for of action. I’m an Aelf token holder and earn $ELF tokens simply by following their Twitter account, liking their Tweets, and engaging in their Telegram channel. I earn on average three $ELF tokens per day by helping others earn tokens themselves. If you want to start with your first bounty program, try joining the Aelf candy system.

What Wallets Do I Need?

For an ERC20 token airdrop you will need an ERC20 compliant wallet. When considering whether to participate in an airdrop look out for whether an exchange wallet will accommodate the airdrop. For Bitcoin, consider one of the wallets on this Bitcoin Wallet guide. For NEO holders, I personally use the NEON wallet created by the City of Zion.